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New monopoly charge vs. Microsoft surfaces at trial

CBS.MarketWatch.com

WASHINGTON (CBS.MW) -- Microsoft tried to use its operating system dominance to force IBM to delay plans to load its own office suite software onto its own computers, an IBM manager testified Monday.

As the second week of the second phase of the antitrust trial got under way in U.S. District Court in Washington, IBM's Garry Norris said Microsoft froze negotiations for a Windows 95 license from IBM until almost the last minute in a dispute over the office suite, IBM's own OS/2 operating system and royalty payments.

Norris, who was in charge of negotiating licensing agreements with Microsoft from 1995 through 1997, said top Microsoft officials
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indicated they would resolve issues delaying the licensing, provided IBM
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would agree to hold off on shipments of its Lotus SmartSuite software, which was a direct competitor to Microsoft Office software.

Office and SmartSuite are packages of business and productivity software that include word processing, spreadsheet and database programs. Microsoft dominates the market.

Norris' testimony is the first in the trial that alleges that Microsoft tried to use its powerful position in operating systems to benefit its applications software. Similar charges were included in the original state lawsuit, filed more than a year ago, but the charges were dropped from the suit before the trial began. The remaining charges revolve mostly around Microsoft's efforts to win market share for its Internet Web browser, Internet Explorer.

Norris is seen as the government's key rebuttal witness in the landmark antitrust trial. IBM is the only computer maker to offer testimony for the government about Microsoft's tactics.

Norris' testimony about Microsoft's alleged use of its Windows dominance to protect its applications software business comes on the same day Microsoft will release its new version of the suite, Office 2000.

Norris told the court that already-icy relations between the high-tech giants turned stone cold in July 1995, shortly after IBM completed the acquisition of Lotus, the maker of popular business software programs.

Negotiations over a Windows 95 licensing agreement had been moving at a glacial pace, with Microsoft keying potential discounts on terms IBM found unacceptable. Microsoft wanted IBM to reduce or eliminate shipments and promotion of its own OS/2 operating system.

Talks then came to a halt on July 20, three days after IBM announced its intention to pre-load Lotus SmartSuite on its own computers and also sell it to other computer makers. Moreover, the impasse came just weeks before the extremely popular Windows 95 operating system was due to be shipped. Microsoft cited the slow pace of a royalties audit for previous versions of Windows.

Failure to conclude the negotiations would have left IBM as the only major computer maker unable to ship machines with the operating system.

Under questioning by Justice Department attorney Phil Malone, Norris said he was shocked by the development, since Microsoft had never tied the audit question to the licensing negotiations before. He immediately contacted his supervisors.

The government introduced a host of internal e-mails and other documents from IBM and Microsoft, as well as hand-written notes from Norris' meetings with his Microsoft counterparts.

An internal IBM memo, dated Aug. 11, 1995, entered into evidence said Joachim Kempin, Microsoft's senior vice president in charge of sales to original equipment makers, indicated Microsoft would be willing to accept a single payment to resolve the audit dispute and resume the licensing negotiations.

The memo, from IBM manager Tony Santelli to IBM senior vice president Richard Thoman, said that Kempin went on to suggest that the payment could be reduced in return for an IBM "offer of good faith ... something he could show (Microsoft Chairman Bill) Gates."

Kempin "suggested IBM not bundle Lotus SmartSuite on our systems for a minimum of six months to one year," the memo said. Thoman dismissed that portion of the overture.

The government introduced an e-mail exchange between Gates and Kempin from March 1995, prior to IBM's acquisition of Lotus, in which Gates asked whether IBM's support of SmartSuite should impact Microsoft's "global relationship" with Big Blue.

Kempin responded: "I'm willing to do whatever it takes to kick them out."

Microsoft and IBM eventually inked an agreement on Windows 95 literally minutes before the new operating system was officially launched on Aug. 24, 1995. But IBM received none of the discounts received by other computer makers and, as a result of the late start, missed a large chunk of back-to-school and Christmas sales, Norris said.

Microsoft disputes the government's description of the events surrounding the Windows 95 negotiations. IBM's own documents call into dispute the reason for tying the Windows 95 licensing talks to the audit, said Microsoft spokesman Mark Murray.

The document in question said that a Microsoft official told IBM that the licensing agreement was tied to the audit after another IBM executive suggested that Big Blue would be unwilling to sign a Windows 95 contract unless the royalties dispute was resolved.

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